Camlin Fine Sciences is a leading specialty chemicals manufacturer in the Diphenol downstream segment. Camlin Fine Sciences is the biggest global manufacturer of antioxidants, namely Tert‐Butyl Hydroquinone (TBHQ) and Butylated Hydroxyanisole (BHA). It is currently undergoing a transformation via capacity expansion to further solidify its leading market share, improve cost competitiveness and focus on value added products.
In 2011, Camlin Fine Sciences acquired Borregaard one of the five global producers of Hydroquinone. Borregaard now CFS Europe, manufactured diphenols namely, Hydroquinone and Catechol that are isomeric to each other. Hydroquinone is the raw material for manufacturing antioxidants. Camlin Fine Sciences sources all the requirements for Hydroquinone (raw material in the manufacture of antioxidants) from Borregaard.
Camlin Fine Sciences also blends its antioxidants as per the requirements of it customers. Blending antioxidants is a value addition (higher margin) over and above the manufacturing of the antioxidant. Camlin Fine Sciences has a unit in Tarapur(India) and Brazil to improve the margins from its antioxidant business. In May-16, to further support this initiative, Camlin Fine Sciences acquired a 65% stake in DresenQuimica a blender based in Mexico.
Camlin Fine Sciences has four revenue streams
- Antioxidants (Hydroqinone derivatives): a bit more than half of the revenue
- Performance Chemicals (Catechol derivative products): a quarter of the revenue
- Aromatics – Vanillin and Ethyl Vanillin (derivative of Guaiacol): ~1% of the revenue
- External sales of Hydroqinone & Catechol by CFS Europe: fifth of the revenue
Source: Camlin Fine Sciences (http://www.camlinfs.com/vertical.php)
Camlin Fine Sciences is currently undergoing a Rs 250 crore capex in Dahej to build capacities for
- Hydroquinone (9,000 mtpa)
- Catechol (6,000 mtpa)
- Vanillin (6,000 mtpa)
The new capacities are expected to be commissioned in FY18, with a full impact in the P&L by FY19.
So do we buy the stock
Only Camlin Fine Sciences and Rhodia have the technology to produce Hydroquinone.
Camlin Fine Sciences has significant market share in the chemicals it produces. Market share in Hydroquinone derivatives
- TBHQ = ~45% market share
- BHA = ~70% market share
- MEHQ = ~ 20% market share
Market Share in Catechol derivatives
- 4-TBC = ~25% market share
- Veratrole = ~50% market share
- Guaiacol = ~8% market share
Expected market share after commissioning of capacity for Vanillin = ~33%
We look forward to the margin improvement from its blending activities. The acquisition of the stake in Dresen along with its blending activities in Tarapur and Brazil would make the P&L look better in FY17.
Cost impact of Hydroquinone and Catechol capacities coming up in Dahej. The Hydroquinone and Catechol produced in India will be cheaper than the imports from its own plant in CFS Europe. Additionally the raw material from Dahej will be a Rupee cost as compared to a forex cost.
Revenue impact of Hydroquinone and Catechol capacities coming up in Dahej. Currently around two thirds of the requirements are sourced from Europe. Once the capacities in Dahej come up, the European plant can sell them in open market. The sale of Hydroquinone and Catechol in the open market by the European plant will have a significant upside on the revenue and sales realizations.
Where is the margin of safety?
The key point of the Camlin Fine Sciences story are the upcoming capacities in Dahej. These capacities will be commercially available in FY19. A lot can happen between now and FY19.
- Diphenol =Any compound that has two phenol groups; especially the isomeric benzenediols (catechol, resorcinol and hydroquinone).
- An isomer is a molecule with the same molecular formula as another molecule, but with a different chemical structure. That is, isomers contain the same number of atoms of each element, but have different arrangements of their atoms.